Annuities safe, but returns can be beat

Q:Over the past few years I have been inundated with offers for free financial seminars that include invitations to a free dinner or lunch.

I finally went to two because the offer for free dinners at two of my favorite restaurants was just too much to resist.

Almost everyone at both seminars was close to my age (mid- to late-50s), and we all seemed pretty interested in what the advisers had to say. The investment products presented were very similar.

Both would allow participation in the stock market but with no downside risk. Even if the market tanks every year you are invested, both products guarantee you can get your money back at maturity or you have the option of taking a guaranteed income stream.

With one of the investment products, if you take the income stream you get a kind of bonus so that no matter how the market has performed, your income stream is calculated from an account value -- almost double what you invested.

With the other investment you receive a 12.5 percent premium bonus the first year as long as you invest more than $50,000 and you are guaranteed a minimum 2 percent return.

Both of these investment ideas sound like something I'd be interested in, but they have what I think are long surrender periods. One is 10 years and the other is 14. I don't think I'll need this money until I retire, and I can take out 10 percent a year without any penalty, but I don't want to make a mistake. I've enclosed more information for your review.

Do these sound like good places for at least 50 percent of my investments I plan to use in retirement?

A:My husband receives two to five dinner seminar invitations each week with tickets for himself and three of his closest friends. I never receive an invitation. I feel so left out!

The seminars used to be held at family-style restaurants at early bird special dinner times. But lately he has received invitations to very upscale restaurants and the dinner seminar begins at 6:30 or 7.

This tells me that more and more people are purchasing the investment products being sold at these seminars and the presenters are making so much money they can now afford to buy pricey dinners at full menu price. What it doesn't tell me is that the investment products being sold are in the best interests of the attendees.

Both of the illustrations you shared with me look great. They make these investment products sound exactly like what poor baby boomers without pensions need to allow them to sleep well at night throughout retirement. Both of these products are types of annuities.

The annuity with the 10-year surrender fee schedule has a rider for the guaranteed income stream, which is only available to people age 55 or older. This means the annuity owner will be at least 65 before he can begin the guaranteed income stream.

The "bonus" illustrated provides a protected value of $485,920, which will generate $24,296 for life with an initial investment of $250,000. This sounds pretty appealing, but you should be able to do just as well with a conservative investment outside of the annuity. This would allow much more flexibility and the possibility for higher returns.

The following is a simplified example of what you could expect investing conservatively on your own: $250,000 invested at 5 percent for 10 years will equal $411,752. That total invested at 5 percent will provide $24,296/year for 39 years. If you began your income stream at age 65, you would be 104 before exhausting your principle.

The annuity with the 14-year surrender fee is prohibited from being sold in some states, but North Carolina allows it. That 12.5 percent teaser premium bonus is hard to turn down but very costly over the long run. The minimum guaranteed rate after the first year is 2 percent and the rate hoped for is 3.15 percent. If you receive the first year bonus and 3.15 percent for the next 13 years, your average rate of return is 3.79 percent.

If you decide you want more than 10 percent a year from either of these annuities before the surrender period, you will pay a hefty surrender charge. The surrender charges for the 10-year annuity are pretty standard, but the surrender charges for the 14-year annuity are obscene.

If you want out in the first two years, you will forfeit 18 percent, 17 percent in year three, 15 percent in years four through seven, and so on.

If you are worried about a steady guaranteed income stream, buy a plain vanilla immediate annuity. Buy one with low costs from a financially strong insurance company. With these annuities, you hand over a lump sum in return for an income stream. In most cases, any funds remaining upon your death revert to the insurance company to compensate them for their risk.

I'm confident I personally can generate an income stream that will equal or exceed that of an annuity. If funds are left over on my death, they will go to my heirs, not an insurance company.